Thursday, 16 December 2010
Seanad Eireann Debate
Minister for Finance (Deputy Brian Lenihan): The Government statement on 28 November announcing the EU-IMF programme for Ireland included as part of the bank recapitalisation and restructuring measures the commitment to prepare specific legislation to support immediate restructuring actions. This legislation has now been published as the Credit Institutions (Stabilisation) Bill and received Dáil approval last night. I can appreciate that some Senators take exception to the fact that the measure is being rushed through the House with considerable speed and expedition. It went through Dáil Éireann in the same way yesterday. However, it is important that we reflect on the nature of the crisis that emerged in the Irish financial position in recent months.
The position with regard to banking issues was made very clear to us with the gradual erosion of the deposit base of the banking system and the insistence by our European partners that we take immediate action to address this issue.
In respect of the fiscal position, the necessary actions were taken in the four year plan for national recovery and in the budget. In the case of the banking crisis, the immediate actions can be dealt with under this legislation. This is why it is urgent. The various approaches taken by the Government to date through the guarantee scheme, recapitalisation and the establishment of asset relief through NAMA were all specifically endorsed by the EU, the IMF and the ECB. However, if a criticism was made of us it was that we did not move with sufficient speed and expedition in these matters. We had many leisurely debates, sometimes too leisurely, on previous banking measures. This legislation enables us to take swift and immediate action.
The detailed recitals contained in the Bill set out the fundamental rationale for this legislation. They highlight the relentless negative effect of the banking crisis on this State’s economy and the need in the public interest for strong measures to resolve the continued serious threat to the stability of the financial system generally. The preamble to the Bill strongly underlines the need for the functions and powers provided under the Bill to effect a reorganisation of the guaranteed domestic credit institutions in the context of the National Recovery Plan 2011-14 and the European Union-International Monetary Fund Programme of Financial Support for Ireland, consistent with EU state aid requirements.
As the Senators will be aware, the key elements of the programme include an immediate and significant recapitalisation of the banks; stringent stress testing and rigorous validation of asset valuations, which may result in further recapitalisation, as required; and a substantial downsizing of the banking system by way of the identification of non-core bank assets and the disposal or run down over time of these assets. The powers provided in the Bill allow the Minister for Finance to execute key aspects of the agreed support programme for bank restructuring. Direction orders may be issued to relevant institutions to take or refrain from taking any action in support of the Government’s banking strategy. Transfer orders may be issued in respect of relevant institutions’ assets and liabilities to facilitate the restructuring of the banking sector. Consistent with the terms of the support programme, subordinated liabilities orders can be made under particular conditions to achieve appropriate burden sharing by subordinated creditors in relevant institutions which have received State support.
I draw the attention of the House to a particular policy priority under the Bill, namely, ensuring that the reorganisation and restructuring measures are recognised in other EU member states through the mechanisms available in the European Communities (Reorganisation and Winding-up of Credit Institutions) Regulations 2004, which implement the credit institutions winding up directive, CIWUD, in Ireland. This is an important issue because many agreements entered into by Irish credit institutions are governed by the laws of other EU member states. It goes without saying that all the powers provided under the Bill must be implemented in a manner fully consistent with EU state aid requirements.
In any situation where a Minister is provided with strong powers, as is certainly the case in this Bill, there is a need for appropriate judicial oversight of the exercise of these powers. The Bill ensures significant judicial supervision of any proposed orders that the Minister prepares. In respect of each of the four orders for direction, special manager, transfer and subordinated liabilities, they are provided for and are to be utilised in a manner which is fully consistent with our legal and constitutional framework.
Any proposed order under the Bill must be confirmed by the High Court, which must be satisfied regarding the legal process undertaken, including in relation to securing the views of the affected institutions and the reasonableness of the Minister’s proposed decision making within the framework of the overall Bill. Moreover, the High Court may set aside, amend or vary an order if it thinks it appropriate and an affected party can apply to the court within a five-day period to have the High Court order set aside. These orders may be subject to judicial review or appeal to the Supreme Court. There are restrictions on when judicial review and an appeal may be made. This approach is in keeping, for example, with the measures adopted in the National Asset Management Agency Act 2009 and in planning legislation. Therefore, the exercise of the Minister’s powers is conditional upon High Court scrutiny and approval by way of High Court order, including through the participation in the courts of affected parties. Importantly, court orders made under the legislation will be recognised in other jurisdictions.
The powers provided under the Bill are fully in accordance with the Constitution. In addition, section 53 will ensure the effective operation of the Bill. Any orders made by the court must be aligned in an appropriate manner with legislation on the Statute Book in order to avoid any actual or perceived conflict of laws. Section 53 ensures clarity and certainty on how the strong powers provided under the Bill interact with the existing legal framework. The purpose of section 53 is to ensure the implementation of the powers in the Bill is consistent with the technical and procedural requirements in existing provisions in any other enactment, rules or other relevant legal documents which might otherwise apply to the business of credit institutions. This is important because any inconsistency will be an obstacle to the implementation of the orders which can be made under the Bill. For that reason, unless otherwise provided, the provisions in the Bill have effect notwithstanding any other provisions in any other enactments, rules of law, codes of practice, listing rules, memoranda and articles of association or any other agreement. It should be obvious that section 53 is an essential provision of the Bill.  There is no question whatsoever that it usurps the role of the Houses of the Oireachtas by enabling the Minister to make orders that make or change laws. These powers are reserved to the Houses of the Oireachtas by our Constitution. The Oireachtas will be amending existing enactments, rules or other relevant legal agreements in this Bill. The orders referred to in section 53 are orders of the High Court. While the Bill provides that the Minister can make a number of proposed orders in respect of directions, special management, transferred and subordinated liabilities, only the High Court can make orders under the Bill. The orders that the High Court can make on foot of my proposed orders relate to matters which are clearly and comprehensively set out in the legislation. There can be no doubt that section 53 is a necessary and proportionate provision in the Bill overall to ensure the efficacy of these orders to intervene in the business of credit institutions.
I will address the key provisions of the Bill. Section 2 sets out the definition of a number of terms used in the Bill. A key definition in this section is that of a relevant institution. Section 3 provides the Minister with the power to prescribe any body corporate with a registered office in the State as a “relevant institution” for the purposes of the Bill. Section 4 sets out the purposes of the Bill which I have already outlined for the House.
Section 5 safeguards the independence of the Governor of the Central Bank. Section 6 provides the Minister with the discretion to agree a framework to govern the relationship between the Minister and the Governor in regard to the exercise of the Minister’s powers under the Bill.
Part 2 of the Bill addresses the making of direction orders. While important powers of direction are available to the Minister for Finance under the eligible liabilities guarantee scheme, it is important to strengthen the legal basis for that power of direction under the Bill. Section 7 sets out the circumstances under which the Minister can make a proposed direction order. Sections 8 to 11, inclusive, set out the procedures for the court to make a direction order on the terms of that proposed order.
Part 3 is an important part of the Bill because it gives the Minister for Finance the power to appoint a special manager with knowledge, expertise and experience of the financial sector to take over the management of a relevant institution where the Minister believes this is necessary for the preservation or restoration of the financial position of that institution. This is an important legal innovation because it provides a mechanism that can be used as an alternative to nationalisation. The special manager is required to operate the institution in a manner consistent with the objectives of the Bill, thus helping to ensure the conduct of the special management is at all times underpinned by the public interest in the maintenance of financial stability. Sections 20 to 24, inclusive, provide for the special management arrangements.
Part 4 provides the Minister for Finance with powers to take certain actions in respect of the subordinated liabilities of relevant institutions to which financial support has been provided under the Credit Institution Financial Support Act 2008. The purpose of this Part is to achieve appropriate burden sharing with holders of subordinated debt in the relevant institutions under the particular circumstances set out in the Bill.
Part 5 gives the Minister the power to make a proposed transfer order which would transfer all or any of the assets and liabilities of a relevant institution where the Minister believes it is necessary to achieve the purposes of the Bill. Section 38 provides for the provision by the Minister for Finance of financial incentives to a transferee but the Bill is clear that any such financial assistance is a debt due and owing to the State by the transferor. Part 6 addresses potential existing administrative and legal requirements whose effect might otherwise impact adversely on the achievement of the aims of the Bill.
I especially draw Senators’ attention to a key section — section 48 — which provides that the overriding duty of directors of relevant institutions will now be to the Minister for Finance, on behalf of the State, to have regard to certain purposes of this Bill. Prior to the enactment of this legislation, the primary duty of directors had been to the bank company. Part 7 contains a number of miscellaneous provisions.
Section 51 provides that nothing in any enactment or rule of law can prevent the Minister for Finance from imposing any terms and conditions relating to the provision of financial support which would be desirable in the public interest. Where the taxpayer is providing extensive support for an institution, there will be grounds for the Minister for Finance to impose conditions on that support in regard to bonuses.
Section 52 is an important section the purpose of which is to ensure orders made under the Bill are consistent with the EU credit institutions winding up directive, as I have previously outlined. Sections 55 and 56 are important and allow the Minister for Finance to exclude a particular institution as a relevant institution under some or all of the provisions of the Bill for a specified period or to declare that the Minister will not exercise all or any of the powers conferred under the Bill in respect of a specified institution for a specified period.
Section 59 provides that the fact the Minister has made or proposes to make a proposed order under the Bill must be kept confidential. Sections 63 and 64 provide for the limitation of judicial review and of certain rights of appeal to the Supreme Court. Section 67 is required to comply with the loan agreements with the European Financial Stabilisation Mechanism and the European Financial Stability Facility under the EU-IMF support programme. Section 69 provides that the provisions of the Bill, other than sections 51 and 67, will cease to have effect from 31 December 2012, or later if decided by a resolution of both Houses.
The Bill provides for the amendment of a number of other enactments. The building societies legislation is amended to facilitate the conversion of building societies into private limited companies. Section 72 amends the Central Bank Act 1942 to allow the Central Bank to share confidential information to facilitate the Central Bank, the Minister, the Governor, the head of financial regulation or a special manager. The amendment of the Central Bank Act 1971, under section 73 of the Bill, is proposed to facilitate a more expeditious transfer of a banking licence holder’s business, including assets and liabilities not directly associated with its banking business.
The purpose of the changes to the Credit Institutions (Financial Support) Act 2008 under section 74 of the Bill are to ensure the Minister for Finance can provide financial support other than by means of direct guarantees and assistance and, in particular, can provide financial support through the normal capital markets structures.
The purpose of the amendments to the National Asset Management Agency Act 2009, under section 75 of the Bill, is to limit the right of appeal to the points which the High Court certifies for appeal to the Supreme Court. It also requires that any appeal be determined by the Supreme Court acting as expeditiously as possible, consistent with the administration of justice.
Section 76 of the Bill provides for a number of amendments to the National Pensions Reserve Fund Act 2000 to enable the Minister for Finance to suspend or reduce the annual contribution to the fund for the duration of the programme; to direct the National Pensions Reserve Fund to invest in Government bonds; and to direct the National Pensions Reserve Fund to make payments to the Exchequer for capital expenditure purposes for the duration of the programme.
The purpose of these amendments is to facilitate the State’s own contribution to the EU-IMF programme of financial support for Ireland over the next three years. It is without question that the powers being provided for the Minister for Finance under the Bill are extensive. They are, however, targeted and proportionate to the scale of the challenge we face. They are subject to consultation with the Governor of the Central Bank and within a clear framework for appropriate judicial oversight. It is important to note the programme also requires us to prepare and publish bank resolution legislation of a more comprehensive and final character by the end of February. The Governor will have a central role in that legislation.
In regard to the current emergency, the Minister for Finance, whoever it may be, must take responsibility and be accountable to Dáil Éireann for the substantial sums of money entailed by our commitment to this programme. For that reason, the powers are conferred on the Minister for Finance in this legislation rather than on the Central Bank. Those powers will lapse at the end of 2012 and much of this legislation is, in substance, resolution legislation. Specifically the provision dealing with the assets and liabilities of banks and the power of the Minister to direct a bank to sell or dispose of assets or liabilities can facilitate very wide-ranging restructuring of the banking sector. I am sure Senators will agree it is of fundamental importance that the Minister for Finance should be equipped with the range of legal powers necessary to continue to maintain financial stability in the State. That is the aim of the legislation before the Seanad.
I commend the Bill to the House but regret I will not be in a position to hear the Second Stage contributions of Senators. I will conduct Committee and Report Stages when I hope we can have a constructive debate in elucidating some of the sections in the legislation within the limited period of time available.
Senator Paschal Donohoe: I welcome the Minister and thank him for his contribution. Given the reference he made to the ECB-IMF support plan for the country, I invite him to make one comment later in the day. A growing number of people are saying that our country was bullied into accepting some form of a deal. I hear it increasingly from young people, who I am looking to represent. Parties on this side of the House would argue that if we formed a new government, we would have the right to go back to the authorities and look to renegotiate elements of it. The Minister may agree or disagree with us on this point.
One point on which we must be united, however, is that there is a vast difference between other authorities, no doubt acting in their own self-interest, forming a resolution in Ireland and bullying our country. That shines no light on our country and encourages some kind of feeling of victimhood which, at this stage in our plight, is the last thing our country needs and it must be strongly rejected.
I refer to the timing of the legislation. The programme this country agreed with the IMF and the ECB states that this legislation needs to be in place by next February. If the deadline is next February, why was this legislation brought in now? The explanation the Minister gave was all about the need to provide a framework to accelerate and put in place further amounts of capital into our banks. We have been putting capital into our major banks under the current legislative regime. If the current law works in regard to the injection of capital into our banks, why is this new law required?
Senator Paschal Donohoe: Okay. What will happen between now and early next year which will require the Minister to override those shareholders? I would appreciate it if the Minister would come back to this later. As I said, the injection of capital alone is allowed under the current framework.
The second reason the issue of timing is very important is that the special resolution mechanism, about which the Minister spoke, is in place in many European jurisdictions. In the three most prominent cases where it has been triggered — Northern Rock in the UK, Fortis Bank in Belgium and Hypo Real Estate in Germany — the shareholders and the stakeholders in those banks initiated strong legal action against those governments and fought them bitterly in their legal system to ensure this mechanism was not implemented. Notwithstanding what the Minister said, that is why it is wrong to put through legislation as important as this so quickly. As we have seen in other jurisdictions, this has been robustly challenged and has ended up delaying what the governments have sought to do in each case.
The UK implemented legislation such as this more than two years ago in February 2008. On the one hand, we have had a long delay since the UK and other countries implemented the legislation while, on the other hand, there is a major rush to get this legislation in place, for reasons about which I am not clear, within a time period shorter than that to which we committed a number of weeks ago. Clearly, this legislation is needed because the normal insolvency or commercial laws to deal with companies under commercial pressure will not work for a bank. The reason, as we all know, is that the failure of a bank poses a far larger systemic threat to the stability of the economy and the country than the failure of an ordinary commercial business. Last February’s IMF report stated: “The introduction of special resolution regimes in individual countries can reduce the overall fiscal burden incurred in resolution and is likely in and of itself to be conducive to more effective management of cross-border failures”. This type of legislation is needed and works in other jurisdictions, but it needs to be implemented with care and scrutinised carefully because it is so important. We will be opposing the Bill in order to ask for more time to debate it.
The literature on such legislation in other jurisdictions outlines a number of central features that are required. The Bank of England produced a report on the matter last summer specifying the requirements of this kind of legislation as including clear objectives; triggers for initiating the regime; a resolution toolkit; different options; the ability to effect partial as well as whole-bank property transfers; and the ability to deal with the issue of cross-border banks. In many cases these boxes are ticked by the Bill; however, there are some legitimate concerns that I will address on Committee Stage, but I also want to raise them now.
The first concerns the nature of the relationship between the Central Bank and the Department of Finance and the Minister, in particular. In the corresponding legislation in other jurisdictions the person or body that implements it is not the Minister for Finance or the Department of Finance — it is not the Treasury in the United Kingdom but the British regulatory bodies. Here we have gone for a very different model. In particular, section 6 of the Bill which allows the Minister to lay down written guidelines for the Governor of the Central Bank is very strong and a unique development. In other countries where similar legislation has been in place for some time the regulatory bodies have been capable of delivering it.
The second issue I want to discuss further relates to the timing of the legislation and when it will kick in. Equivalent legislation elsewhere offers a government the ability to intervene before a bank reaches the point where it would pose a systemic threat to the financial stability of a country or an economy. Examples include what happens in France where the regulator has the ability to provide a special manager — as the Bill provides for — before a bank becomes insolvent and poses a threat to the stability of the entire financial system. Similar regulations are in place in Switzerland. Other jurisdictions such as Italy also offer the ability for a moderated form of this legislation to be used when a bank is capable of taking or about to take actions that could make it pose a grave threat to the surrounding economy and other banks.
The third point relates to the purposes of the Bill and the prominence of Anglo Irish Bank and the way it is described. I am beyond puzzled, if not intrigued and disturbed, to see the statement in section 4(c) that the purposes of the Bill include: “to continue the process of reorganisation, preservation and restoration of the financial position of Anglo Irish Bank Corporation Limited begun with the Anglo Irish Bank Corporation Act 2009”. On what future path for the banking system are we laying out an objective that specifically includes restoring the health of Anglo Irish Bank? Only a few weeks ago Commissioner Olli Rehn — or an equivalent in another body — said he was looking forward to and believed he would see the day when the presence of Anglo Irish Bank would be removed from the economy completely, yet we are now introducing legislation that seeks to restore the financial position of the same bank. If we have time later, I would definitely like to tease out this matter. We need to understand why the Government believes this is an objective worthy of inclusion in the Bill and its future banking policy.
There is similar legislation in many jurisdictions. While the Bill’s proposals have much in common with what has happened elsewhere, there are also many important points of difference, notably the primacy of the Department of Finance, its failure to provide for intervention before a bank reaches a grave stage and the specific numeration of a particular bank with the objective of restoring it to financial health. Even though similar legislation is in operation elsewhere, when it is implemented — the next Government, regardless of the parties involved, will need to deal with bondholders and shareholders — it will be vigorously contested in court. With that in mind, it is imperative that we take a more careful and deliberative approach to tease out the issues involved.
While the legislation allows the Government to initiate a process of debt sharing with subordinated bondholders, it does not allow this to take place with senior bondholders. We have had a discussion about why that might be possible or not possible here and elsewhere on many occasions. In recent weeks the weight of international and, in particular, European opinion on the matter is beginning to adjust. Yesterday’s Financial Times quoted a very prominent former German Minister and German MEPs stating they wanted a mechanism to be put in place to restructure senior banking debt. Mohammed el Erian who runs a large investment fund in America and is tipped to be given a prominent role in the IMF has also laid out the need to find a way to restructure senior banking debt. We could find ourselves in a position where the weight of international opinion is moving in a different direction from that taken here, while we have legislation that confines itself only to subordinated bondholders. That is an omission that should be accounted for and addressed later.
Senator Marc MacSharry: I welcome the Minister of State, Deputy Mansergh. I am glad the Minister for Finance, Deputy Brian Lenihan, was able to join us earlier and that he will be returning to take Committee Stage when other points can be made. Senator Donohoe was very measured and eloquent in his contribution in which he made some interesting points which I am sure the Minister will address in detail on Committee Stage. On the weight of public opinion in focusing on burning senior bondholders, I do not consider that a number of articles in the Financial Times or a number of individual views represent the weight of international opinion that Ireland should be a laboratory experiment to see what would happen if we were to default. On another occasion I believe the Minister of State, Deputy Mansergh, cited the example of Argentina which defaulted and decided to seize all savings in hard currency and replace them with 25 pesos in the dollar. That is what happened when it chose to default and it still cannot get money.
Senator Marc MacSharry: I know the Senator is not. However, he asked for a debate on the issue. I am informing him of this point of view which is other than that of the former German Minister and the MEPs the Senator mentioned. I would not be in favour of it. Argentina is not able to access money on world markets and is dependent on others; President Chávez of Venezuela may have extended it a conditional loan. It is not the way forward for us. It remains the case, obviously, as the House will be aware, that senior bondholders are on the same legal basis as depositors. If there was to be a eurozone-wide new approach to senior debt then, of course, that is something that could be debated, but at this moment I would be fundamentally opposed to us being the guinea pig to see how it might work out for others. Just because the Financial Times or has beens in the political or financial world advocate it does not mean it is necessarily the correct position.
The Minister has gone through the legislation before us section by section. Clearly, there are issues with it. Clearly, there are issues with the time being allocated to debate it. That was an issue in the other House. There are many hours since it was first published and there has been ample time for people to go into the various sections.
Senator Marc MacSharry: ——because it gives the people the level of control and influence in the banks for which many of us have yearned for the past number of years. It is welcome in that regard. It vests the people's power through the Minister in controlling aspects of the banks which is much needed. As with other measures in recent weeks, with the support from the IMF and the EU, it provides us with the basis to give us that point of inflection for which many of us have yearned for the past three years to move forward from this crisis.
Clearly, there are measures within the Bill that are Draconian. The Minister mentioned the nature of some of them. Clearly, there must be consultation between the Central Bank and the Minister on a number of measures, and that is also to be welcomed. However, I am confident that for the year that these powers exist, we can move forward to restructure our banking system and finally begin to put behind us the mess which has been our banking system for the past few years.
On the issue of directing the sale of assets within the financial institutions, I caution that there should be serious debate over which assets are disposed of. There might be a concern that some good aspects of these institutions may be sold because they are more saleable at this time, about which I have concerns. While the Minister can clearly direct this, I ask that when it arises some level of debate take place because I fear there might be a tendency to sell the family silver.
I look forward to the opportunity to contribute on Committee Stage. I welcome the legislation as a further step in the right direction. There is a public demand to bring some kind of closure to the banking situation. It has been fluid. It has had to be. The goalposts have changed many times throughout the past couple of years. I hope that with this legislation we can move quickly and decisively to draw that line in the sand and recreate our banking system on a level which is consistent with the needs of our economy and which, finally, caters for businesses and families throughout this country which require credit lines to function. I hope we can move with these powers to do that quite quickly.
Senator Alex White: While I do not want to misrepresent him, Senator MacSharry stated that it often occurred to him that this type of legislation ought to have been introduced before now, and I share his sentiments in that regard. He is absolutely right.
On many occasions the Minister for Finance, Deputy Brian Lenihan, and the Minister of State, Deputy Mansergh, have sat here in this House. I must sit down at some stage, if I ever have time, and go through the debates because I can recall on many occasions the robust resistance from the Minister and the Government on certain policy choices which Members on this side were advocating, particularly on intervention in the banks. I remember being told, in fact, almost to the point of being ticked off, not by the Minister of State, Deputy Mansergh, but by others, about the extraordinary reputational damage that would be caused to Ireland, for example, by any signal that there would be substantial State intervention in the banking system at an early stage in the crisis, that this could not happen, that the reputational damage this would cause would be extraordinary, and that we were doing a disservice to the State by even talking about it or advocating it. Sadly, many months of reputational deterioration for this country later, the Government has found itself in a position where it must make these decisions. The difficulty is that if these were decisions that had been made in a timely fashion they would not look like decisions that had to be dragged out of the Government which, ultimately, is the way they now look for history to see.
I heard Senator MacSharry speak of his understandable opposition to any notion of default, with which I agree. I do not direct this personally at him, but I worry sometimes when people say we will not default because when certain persons say things, I am often tempted to think that in fact that is precisely what will happen. The Minister stated there would not be intervention in the banks; we had intervention in the banks. The Minister stated repeatedly there would not be any question of the IMF; we had the IMF. All of the things that were never going to happen, happened. I worry when Members on the Government side state that we will never default. I start wondering is something going to happen that they have not told us about because often the polar opposite to what the Government states is its policy ends up being done at the end of the day.
On the content of this legislation, as Senator Donohoe pointed out, of course, resolution legislation and the kinds of mechanism that are at least signalled in the Bill are necessary. There is no question but that the great bulk of what is in this legislation is, in fact, necessary.
In case I go off the point, I share Senator Donohoe’s point, which perhaps Senator MacSharry needs to understand. As I understood it, Senator Donohoe was not advocating any restructuring of the debt held by senior bondholders. He was simply stating, as certainly is my view, that there should be legislative provision for such an eventuality, not that it should be triggered.
Senator Alex White: If we are supposed to be doing this in a comprehensive way, let us put it into the legislation. That does not mean it will be invoked. We all very much hope that it can be avoided. Many respected commentators have stated not so much that they think it is a good idea, but that they believe it may be difficult down the road to avoid. Why can the Government not speak the Queen’s English and state that is the position, let us put it into the legislation and let us, of course, by policy means and otherwise, seek to avoid it happening? That does not mean that because the Government does not want to mention the “D” word, there cannot be provision in legislation for the eventuality where there is some issue in respect of the senior bondholders in the way that the Government has now acknowledged there is in respect of those who hold subordinated debt. It is a legislative, enabling provision, which need not be triggered.
On the legislation, whereas it is important, it is not good enough for the Minister or the Government side to state we can have Committee Stage this afternoon for two or three hours. This is comprehensive legislation. It was published on Tuesday, as I stated on the Order of Business. It was put through the other House yesterday and it is proposed to put it through this House today. Apart from the disservice that does to Members in this House, and while the Minister of State may say we can speed-read it, take our advice, talk to our people etc., it does a disservice to the community because people deserve the opportunity to consider these issues over a period at least of days and preferably weeks. There are important committees in these Houses which have a good record in addressing the detail of this type of legislation. Why did a committee not consider this?
The Minister for Finance stated in this House on a number of occasions that this type of legislation was in the “pipeline”. At earlier stages he seemed to resist it or not think it important but in recent months he signalled that it was approaching. When was this legislation first conceived and when was the first work done on it by the Government? It would have been done in the Department of Finance and I presume that along the way there was advice or input from the Attorney General. When did it start? I do not want to know any secrets and I am not looking for the Attorney General’s opinion on this, that or the other. I just want to know the date work started on it.
It seems highly unlikely that the first work done on this legislation would have been done after the agreement with the IMF. I presume the legislation has been in a state of preparation for some time. Why did we not have a debate and why could we not have discussion on its contents? What is the business of coming in on a Tuesday, publishing a Bill one day, passing it in the Dáil the next day before putting it through here on a Thursday? We are then told that we can discuss the Bill on Committee Stage. It is not good enough for the Government in this crisis and with these issues to act like this. We should not get too upset about ourselves and the way the Parliament is treated but the people are also treated with contempt. This is an issue which the people should see as being allowed to breathe in public discourse and discussion. There is no allowance for that to occur.
With regard to the contents of legislation, one of the areas that people have focused on is section 53. In the spirit of the relative independence of this House and its Members, I express the view that the powers being taken by the Minister in section 53 are not unreasonable. If there is to be a serious intervention where the Minister is fortified in what he or she is doing in these matters, the powers are not unreasonable. I say this because I know the section has been criticised. I take the criticism that has been made with regard to oversight of the Minister’s powers, and the Minister explained in his speech that there was a high degree of judicial oversight provided. The Minister explained that judicial oversight would be available. To the extent that the Minister gives such an assurance, it is not beyond the bounds of what is reasonable that there should be very firm powers given to the Minister and the Government in contemplation of what should be done.
I made the point about section 28 and burden sharing. I reinforce the point that it seems there is nothing to stop the Government going further and simply having an enabling provision allowing it to act on other types of debt in future. Section 4 deals with the purposes of the Bill which are at the heart of the matter. This relates to the basic point of when this legislation was conceived, developed and written. At the end of 2008 and in 2009 there was a need for legislation to provide for every item in section 4.
Senator Alex White: There was no reason to delay and it was damaging to do so. One could tick every box in respect of the contents of the section and none of the requirements is new. They all were in place on the morning after 29 September 2008, if not in the weeks and months before.
Senator MacSharry did not refer to the next point as a criticism but he is correct in saying the biggest problem with this legislation is that it has come too late and was delayed for too long. Once it finally arrived in the week before Christmas, there was not sufficient time to carefully consider undoubtedly necessary aspects to it and to query any problems that might arise, whether in respect of section 53, as raised by some, or the confidentiality issue.
There appear to be many provisions in respect of confidentiality which I do not quite understand. There is a provision in section 59 which the Minister of State might address. Everybody understands the requirement for confidentiality with matters that are commercially sensitive but where the Minister is making key moves under this legislation in respect of making ministerial orders, why would the making of such orders be confidential? I do not understand that as the Minister is acting in trust for the public in matters of great importance.
Senator Dan Boyle: This morning I attended the MacGill forum at the Royal College of Surgeons in Ireland, where the proceedings of the summer school were published. I made a contribution at that event on the topic of banking reform. Senator White and others mentioned the lack of debate on this Bill. There has not been a lack of debate on banking policy or in this House on the need to address such measures or hold open the possibility of such measures in the first place.
Government policy, as it transpired, has always been based on an understanding that in so far as is possible, these difficulties should have been worked out largely within the financial institutions themselves using private market mechanisms. As things turned out, we learned first — despite a lack of proper information, deceit and dishonesty on behalf of many institutions and people involved in those institutions — the scale of the problem and the need for the Government to intervene at various and growing degrees in protecting national interests. That was the sole factor behind policy.
It would have been an error to nationalise, partially nationalise or cede large degrees of ownership in 2008. That would have led to us acquiring more of the debt more quickly and getting ourselves into difficulties in a shorter time. It was right to hold open the prospect which I have heard the Minister for Finance and his Minister of State mention in many debates in the House that the possibility of additional and large scale ownership of these financial institutions was still a potential part of policy. That is the genesis of the Bill and it has already been discussed in this and the other House.
If I have a criticism it is about the number of pieces of legislation we have had to introduce in this area because we are still of a mindset dealing with the effects of this crisis. This is just another piece of enabling legislation and we must still fill in the gaps in the nature of the types of banks we will have after this crisis. How many banks will exist? What type of banking will they carry out and how will they be directed as financial institutions operating in the interests of the economy? It is detrimental to all of us, in this and the other House, that we have been so preoccupied in dealing with the effects of the crisis and mechanics that we are missing the larger picture. We still have that difficulty going into 2011 and beyond. It is something to which all politicians and political parties should make a contribution.
There were criticisms of particular measures mentioned by previous speakers, including omitting senior debt and the mentioning of subordinated debt. I do not see that as a problem because the mechanisms I see relating to subordinated debt concern writing it off totally in relevant circumstances. I understand senior debt can be negotiated downwards at any time according to the usual practice. Ireland has a particular difficulty, however, in that we have accepted a package in which this policy option is not available. It may become available in the future because there is no legislative bar preventing the State, acting on behalf of the financial institutions in question, from seeking to renegotiate senior debt. The mechanisms in the Bill provide for the writing off of subordinated debt in its entirety. I have not heard anyone argue in favour of writing off senior debt in its entirety.
The problems we are experiencing were brought about partly by comments made by Chancellor Merkel. In raising the possibility of senior debt being renounced she sent the markets into a tailspin and the economy came under pressure. Suggesting Ireland can somehow get ahead of the posse and operate in isolation to solve our problems lets people down because it creates false expectations.
Some of the figures we have heard are inventions. The leader of the Fine Gael Party, Deputy Kenny, in an interview on “Morning Ireland” today, referred to a figure of €25 billion of senior debt. He is incorrect and when such figures are placed in the public domain——
Senator Dan Boyle: I understand senior debt in all banks amounts to approximately €15 billion, while subordinated debt amounts to €10 billion. These are the figures I have heard. It is a pity people cannot make a distinction between types of debt. It is dishonest to suggest all debt can be eliminated with the flick of a wrist. At best, we will be able to negotiate a discount on debt. Even to touch senior debt we would be required to first consult the European Central Bank and our partners in the European Union. This is the position in which we find ourselves, regardless of which party is in government. It is wrong to suggest the agreement reached with the European Union and the International Monetary Fund can be renegotiated. The legislation is especially important for this reason.
While it may become nauseating with repetition, I must again point out, as I do each time the House passes banking reform legislation, that the frustrating absence of action against individuals whose activities, greed and avarice brought us to this point sits ill with the people. Action must be taken to identify the individuals in question and use the judicial system to call them to account for the most serious economic crimes committed in the history of the State. The lack of activity in this regard is driving the anger and frustration of members of the public.
This legislation is necessary as it can be used for beneficial purposes to ensure the events of the past are not repeated. In passing the Bill we must realise, however, that a more serious wound needs to be healed in the economy and society.
Senator Feargal Quinn: I welcome the Minister of State, Deputy Mansergh. I also compliment the Minister for Finance, Deputy Brian Lenihan, on his grasp of the various challenges facing the economy. I have been impressed by the manner in which he has handled developments. He appears to be in control of what is a fast-moving situation.
I have found myself on a steep learning curve as I am not well informed about most of the issues that have arisen in recent times. I have followed commentaries in newspapers and journals on the Internet to ascertain how often Ireland’s handling of its problems has been challenged.
It is interesting that the Fine Gael Party will oppose the Bill on the grounds that it is being rushed through the House rather than because of its contents. I understand the legislation will allow the National Pensions Reserve Fund to invest in companies which are not listed on stock markets. This would allow the Government to acquire a 100% stake in Allied Irish Banks, thus wiping out shareholders’ investments and removing the bank from the stock market. The National Pensions Reserve Fund could still be used to recapitalise the bank. The logical conclusion is that AIB will be nationalised before the year is out and all its shares written off.
Many others and I argued many months ago that Allied Irish Banks and Bank of Ireland would need to be nationalised. The Government was afraid of the word “nationalisation” and insisted the banks did not need to be nationalised. While I was not enthusiastic about the prospect of nationalisation, the Government should have taken the step it now proposes at the outset.
I ask the Minister to make clear what his plans are with regard to the nationalisation of Allied Irish Banks. Is this the reason Mr. John Bruton, wearing his IFSC hat, is in the Middle East? Is he trying to flog Irish banks to Arab sheiks or others in the region who may consider acquiring them? If that is the case, he has a challenge on his hands.
Sections 28 to 32, inclusive, appear to give power to the Minister for Finance to make debt for equity swaps with holders of subordinated debt. The Minister appears to have come around to the idea that investors’ stakes may be swapped for shares in the banks. Many experts argue that Ireland should also adopt this approach to senior bondholder debt. In other words, we should swap senior bondholders’ investments for shares in the banks and allow them to take control of the banks. They would then have good reason to ensure the success of the bank in which they hold equity. If the Government adopts this approach, it will mark a policy U-turn by the Minister.
Who pressed for losses to be taken by holders of subordinated debt? Was it the Minister or the European Union? Given that debt for equity swaps take place every day in the world of business, why can they not work in the case of our senior bondholder debt problem? Some economists argue that the honest course of action would be to pass a bank resolution Act to swap the debt for shares. Such a debt for equity swap would remove a liability of €120 billion from the national and international balance sheet. A bank resolution Act was introduced in the United Kingdom last year and new legislation, the Dodd-Frank Act, was recently passed in the United States. Is the Minister coming around to the idea of introducing bank resolution legislation? Its introduction would allow us to start addressing the real problems in the economy.
The Financial Times has just predicted that the next Government will renegotiate the terms of the bailout, in other words, it will default on some debt. This appears especially likely, given that senior figures in the European Union have indicated that an amendment to the founding treaties is imminent to enable senior bondholders to take a hit in the future. The Bill appears to leave the door open for later amendments to provide that senior bondholders will be treated in the same manner as subordinated bondholders. If the Government is so concerned about the markets, is it not logical that investors would be more wary of investing in Ireland in the light of the treatment of holders of subordinated debt, as provided for in the Bill, and the possibility that senior bondholders will be compelled to take a hit in the future? I am interested in the Minister’s view on this issue.
The interest rate on the £3.25 billion, 7.5 year loan from the United Kingdom is estimated to be 5.9% for the first of the eight tranches to be disbursed in September next year. This is slightly higher than the average rate of 5.8% on the overall €85 billion bailout package from the European Union. I was struck by reports that Iceland yesterday negotiated a ten year loan to repay bank debt held in the United Kingdom and elsewhere at an interest rate of 3.2%. One newspaper, the EU Observer, states: “Repayments will also be capped at a rate linked to a percentage of Icelandic economic growth, giving the country room to improve its economy rather than spend all its energy on paying back foreign debts”. Will Ireland have an opportunity to reinvigorate its economy rather than paying a much more punitive rate than that provided for Iceland? While I accept that Iceland negotiated its rate with Britain rather than the European Union, could our interest rates not be linked with economic growth? This would be the most logical solution. We should have had much more hard-nosed and business oriented negotiators bargaining down the incredible interest rate applied to the bailout.
I read only yesterday that the Government has injected a further €525 million into the Educational Building Society. I wonder whether the fact that AIB is to be given €3.7 billion within the next two weeks has been obscured to the public by the wider EU-IMF bailout. I have seen little mention of this injection of funds to AIB. I also wonder about section 53. Some legal experts say is unconstitutional as it replaces the powers of the Oireachtas with ministerial powers. The Minister touched on this matter. A future Minister could find himself or herself open to challenge very soon.
As regards the bonus issue, especially the bonuses being claimed by AIB employees, it would be interesting to know the legal costs of the 90 employees taking a legal action against the bank, which is owned principally by the taxpayer. I was interested to hear the bonuses being described as discretionary and contractual. If they are contractual, surely they should be described as a commission. In other words, if I sell something on commission I have a right to that commission. That is the deal I have, as an employee. If the bankers claim their bonuses are a commission, they would have a right to them, but if that is the case, I do not understand why the bonuses were described as bonuses. If a bank becomes insolvent and only functions because of investment by the State and a future commitment of almost €10 billion, surely such insolvency should mean there should be no payment of bonuses. If I may be cynical for a moment, I suggest the Minister knows the Government has no control over the payment of bonuses and is waiting until the new Government comes in and is left with that burden and embarrassment.
I support the Minister’s good intentions with regard to the Bill although I could argue it is two years too late. However, it is right that we have it. I regret it is being rushed through at such speed but that is not reason enough to vote against it. I support it although I am disappointed by the length of time it has taken. At least we have taken this step. Like other speakers, I express my disappointment we did not have more time to consider the Bill and must rush it through in one session.
Senator Fiona O’Malley: I will make a brief contribution. I sympathise with Senator Quinn about the level of confusion and the steep learning curve all of us are on in understanding the financial and banking situations. I am sure that like many Members he has learned things he never knew about the workings of the financial market.
Listening to the debate, I found Senator Alex White’s contribution, in particular, to be very measured, much more so than that of his party’s spokesperson in the other House. That is where I have some slight confusion. The Labour Party spokesperson in the other House spoke of draconian measures whereas Senator Alex White thinks the Bill, although two years too late, is a measure we should adopt and that the banking sector requires this support and level of intervention. There appears to be a breakdown of communication between the Upper House and the Lower House.
Senator Fiona O’Malley: That is the reason I wanted to make a contribution. I also found very valid points in Senator Donohoe’s contribution. It would be very useful to get a good debate going on Committee Stage about the provisions contained in the Bill. I particularly wanted to echo the questions put by both Senators White and Donohoe, especially that of Senator White concerning preparation in the legislation of a provision for default. The Minister of State, Deputy Mansergh, has the assistance of his experts. What would be the consequences or what would the Minister of State understand to be the consequences of providing for a default provision within the legislation? Senator MacSharry made the point that that was what got us into trouble and that any notion of a level of ambiguity in this area is what made the markets go wild. The one thing we need is security. Is this a reason there is no such provision? I would be interested to hear an answer.
Equally, the point Senator Donohoe made about section 4 was very valid. He asked whether we really wanted to restore Anglo Irish Bank to what it was. I am interested in that because I believe what the Government has been trying to do is to move towards an organised wind down. I am sure the intention is not to bring back Anglo Irish Bank to its previous position. Senator Donohoe’s point requires some clarification. Why is this mentioned in the section?  Like him, I would be surprised to find that to be a purpose of the Bill. Some clarification is required.
I agree with the point made about constitutionality. This is very tricky and complex legislation. It is a fair point that we may not have enough time to go through the complexities as we would all wish to do. As with other legislation we may find it will run into trouble.
As I understand it, the Government is not in a position to advise the President to call the Council of State but I would hope the President might be inclined to do so. It is the type of legislation that needs to be solidly and rigorously — what would one say——
Senator Fiona O’Malley: ——strengthened before it is enacted. I realise we should not encourage the President as to how she does her job. Senator Quinn also commented on constitutionality. It is not something we can ignore. I hope the President might be inclined to take that action.
Senator John Hanafin: In supporting the Credit Institutions (Stabilisation) Bill 2010, I am certain the banks gave wrong information at committee and directly to the Department of Finance. Whether this wrong information was given knowingly remains to be seen. Notwithstanding that, in checking the stability of banks recently, the European Union found that all Irish banks, other than Anglo Irish Bank and the Irish Nationwide Building Society, were believed to be in a solvent and solid position. We now find that was not the case. It was not only the Government and the Oireachtas that were misled but also the European Union. The Government must take strong and firm action, therefore, and take a strong and direct legislative role in dealing with the banks.
When we look at the banks, we must look at the context in which they operate. If the situation is one of a permanent downward spiral we will have very severe difficulties and it will be almost impossible to reach their lowest tier. In the last quarter the economy grew for the first time since 2007. This is very good news because it underpins the presumption made in the budget that we would have a modest growth rate of 1.7% next year. That is very achievable and we may even see modest growth within this calendar year.
With this in mind, what else has been done to ensure the stability of the banks? Given that they have such a dependence on property, another welcome measure in the budget is the reduction of stamp duty to 1%. That should provide a floor in order that we would know what the losses will be.
We are certain the Minister needs these powers, as will any future Minister for Finance. These bonuses were going to be paid by the bank, albeit not willingly. In that situation we see the old culture again. Some people still have not fully grasped the new dynamics operating in the economy. These are very straightforward. The old ways are finished, there is a new way of doing business and it will not be along the ways that were in place in 2007, the year that got us into these difficulties.
We will see a significant recapitalisation of the banks in conjunction with the Basel requirements. The Irish banks will have a 12% core tier 1 ratio of reserves which is a very strong backing. It is necessary and the markets need to know it will be in place, especially because there has been a haemorrhaging of funds from Irish banks. In addition, the international press, either deliberately or because it does not fully understand our situation, has given very bad press to the economy. With that in mind we are underpinning the banks. We are insisting that non-core assets will be sold off and that non-performing loans will be transferred to NAMA. We want to have a good banking system. It is not a case of saving the banks, as has often been suggested by the Opposition. It is never about saving the banks but always about saving the economy.
Senator Joe O’Toole: I do not see any speaker on the other side of the House. It will be quite appalling if Fianna Fáil, the main Government party, takes only two speaking slots, one of which is shared, on this important Bill. Its doing so reflects the contempt with which this House is being treated in certain places. This is probably the most crucial Bill——
In welcoming the Minister of State, Deputy Mansergh, I speak as one who has tended to support all the main decisions of the Government in recent years. I had an argument with the Minister during the week. He challenged me on why I had supported a motion of no confidence in the Government. I pointed out to him that it had very little to do with Government decisions but with the current process, structure, shape and architecture of government. In my tending to support the main decisions of the Government in recent years, I defended them better than many in Government parties. I refer to decisions from September 2008.
Senator Joe O’Toole: I may well have to do so. It should be pointed out to my colleagues in the Labour Party that every time they say they did not vote for the guarantee, every significant financial commentator says those who voted for it were absolutely correct. Commentators have pointed out the chaos that would have been created had there been no guarantee. Professor Honohan’s report is very clear——
We are making a huge mistake with this legislation. I have seen this happen before with rushed legislation. I note we are amending the Building Societies Act 1989. It was rushed through this House and caused problems thereafter.
I do not understand what the Minister refers to as the recitals in the first two pages of the Bill, which I presume constitute what we used to call the Long Title. Issues arise in this regard. There are points in the Bill that I do not understand and on which I would like clarification. While there is no chance of my seeing the early drafts of the recitals, I would love to. I would love to see what was intended and how the drafts were changed.
Is this the third time we have seen the phrase “in the public interest” in the Long Titles of Bills recently? The phrase seems to have gained a legal personality all of its own. This is new to me as a legislator. I am not saying I do not welcome this but I would like to have it explained to me where it fits into the broader scheme. It is very handy for our friends down in the courts to rely on this phrase when they want to make a pragmatic judgment that may not quite be in line with their interpretation of the law as it has stood heretofore. It is very difficult for any of our legal friends to make a finding against the phrase “in the national interest”, now referred to as “in the public interest”. What is the legal history of the phrase and how did it obtain a legal personality all of its own?
When I read phrases such as, “AND WHEREAS THE FUNCTIONS AND POWERS CONFERRED BY THIS ACT ARE NECESSARY TO SECURE FINANCIAL STABILITY AND TO EFFECT A REORGANISATION OF CERTAIN CREDIT INSTITUTIONS”, I believe the Government is anticipating a legal challenge. I do not know whether it is appropriate to have such content in the Long Title. I do not have any problem with the Government anticipating a legal challenge and doing all that is required of it to meet it.
What worries me most about the Long Title is the phrase, “AND WHEREAS THE COMMON GOOD REQUIRES PERMANENT OR TEMPORARY INTERFERENCE WITH THE RIGHTS, INCLUDING PROPERTY RIGHTS, OF PERSONS”. The Minister is asking us to pass legislation that may stand the Constitution on its head. There is much legislative precedent for interference with property rights. Property rights, as dealt with in the Constitution, have been discussed many times, but one should not interfere permanently with rights. Either one has a right or one does not. The only place one can deal with this is the Supreme Court by way of interpretation where there is one right in conflict with another. This is dealt with regularly and a judge must make a decision.
The Minister is asking us to do something that I, as a legislator, believe is impossible. I would be prepared to state, “AND WHEREAS THE COMMON GOOD REQUIRES TEMPORARY INTERFERENCE WITH THE PROPERTY RIGHTS OF PERSONS”. I could well understand that as it would make sense, but stating “RIGHTS” and adding “INCLUDING PROPERTY RIGHTS” goes far beyond what legislators are entitled or empowered to do. It is inviting a legal challenge. I would like to know the legal history and precedent that provide the basis for our being confident and comfortable about going down this road.
I completely agree that there needs to be urgent reorganisation. Restructuring is very difficult but I have no idea how it can be achieved. We passed the Building Societies Act and other banking legislation to ensure people could not take shortcuts through legislation. I would like someone to explain to me how one can include two building societies and a bank in one unit. What is the legal process and what issues need to be dealt with? Who will advise us on and guide us through the process? To what kind of person does one go for advice on doing this job, however worthy the objective? I agree with the Minister of State that the objective is good and do not want him to tell me I believe otherwise. I am all in favour of the objective but wonder how it can be achieved.
I support the need for this legislation although I have serious difficulties with it. While I cannot go into detail, I believe we should be teasing out the legislation section by section. It should take time. All who spoke on this side of the House made that point. There is far too much in the Bill to rush it through. Problems will arise and we need to address them.
Let me outline the reason for the legislation. I hope the next Government, irrespective of its flavour, shape or colour, will have only one remaining economic variable to deal with, namely, the issue of growth. I hope all the other problems will have been known about and understood and that we will have known our approach with regard to austerity measures in order that the new Government will be able to concentrate on growth.
This legislation may land us in the courts, although the courts will ensure, in the public interest, that cases are taken pretty quickly. We are inviting court action, court statements and prolonged legal challenges on foot of the legislation. It is trying to do too much and our approach is not safe. It is unsafe legislation.
Minister of State at the Department of Finance (Deputy Martin Mansergh): I thank all the Senators who contributed to what I consider to have been a really good debate. I have had the benefit of sitting through the debates in both Houses. If any issue arises in the term of the next Oireachtas on the need for and future of the Seanad and I am in a position to participate, I will certainly cite my experience of the economic debates in this House.
Let me reply to Senator O’Toole. The Minister was present to commence this debate and will be back. Along with the Tánaiste, he is one of the most senior Ministers in the Government. I really do not believe it is appropriate to suggest my party had any contempt for the House. The very opposite was the case.
Senator Joe O’Toole: On a point of order, I had not the remotest intention of criticising the Minister. I was criticising the Minister of State’s party colleagues in this House. I had no intention of citing the Minister.
Deputy Martin Mansergh: Can I defend my party colleagues in this House? They contribute a great deal to debates. The Minister has given a particularly authoritative presentation and my understanding is that he will be here for most, if not all, of Committee Stage. That will happen a little bit earlier than might have been anticipated. I wish to make a few general points and then to deal with the specific points raised by Members.
A key commitment in the financial support programme with the IMF and the EU is the comprehensive restructuring of the banking system. As has been articulated by the Minister for Finance, the programme provides for the downsizing of the domestic retail banking sector to create a smaller national banking sector more proportionate to the size of the economy and capitalised to the highest international standards. This Bill provides the broad powers needed for the Minister for Finance to act on financial stability grounds to effect swift restructuring action and recapitalisation measures as envisaged in the programme. It is the first important step in putting in place an extensive special resolution regime that will provide for a comprehensive framework to facilitate the orderly management and resolution of distressed credit institutions. In that context the Bill includes the powers to appoint a special manager to a relevant institution, which will only arise in limited and exceptional circumstances, to achieve the objectives of the legislation.
Under the EU-IMF programme, there is a commitment providing for a comprehensive special resolution regime to be introduced to the Oireachtas by the end of February 2011, which would include the full suite of SRR powers based on international best practice and the evolving EU framework. Depending on electoral timetables, it could be one of the first items of legislation in a new Oireachtas.
Once the Bill is enacted, the powers available to the Minister would enable the substantial and significant restructuring actions envisaged in the support programme to be progressed and the provisions would facilitate the disposal of non-core assets to support the achievement of funding targets set by the Central Bank of Ireland, while allowing the Minister to provide credit enhancement that could help to support progressive reduction in the balance sheets of the domestic credit institutions through, for example, the securitisation of bank assets. These powers would underpin the restructuring of Anglo Irish Bank and Irish Nationwide Building Society, as set out in the programme agreement and, as is consistent with EU state aid requirements, provide scope for appropriate burden sharing for subordinated debt and provide the Minister with the power, if necessary, to effect a recapitalisation of AIB prior to the end of the year to meet regulatory capital requirements set by the Central Bank of Ireland.
There was much comment in the debate about the need for senior bondholders to accept their share of the burden of this crisis. This point surfaced in this debate. When those who deplore the erosion of the deposit base of the Irish banking system come to reflect on it, they will see the substantial contribution made to that process by the unhelpful level of domestic discussion about this matter over recent weeks. To be fair, there was a European dimension to it as well. The Minister dealt with this issue yesterday in the debate on the IMF-EU support programme. There is simply no way this country, whose banks are so dependent on international investors, can unilaterally renege on senior bondholders against the wishes of the European Central Bank. In such circumstances the Central Bank stands behind the affected banks throughout the resolution of the crisis and those who think we could unilaterally renege on senior bondholders against the wishes of the ECB are not facing reality. The suggestion that there are no costs associated with default is entirely incorrect. This country is dependent to a great extent on foreign direct investment. These companies have large funds and investments in Ireland and directly or indirectly employ 250,000 people. Any default on senior debt and the uncertainty that would cause would undoubtedly have an impact on future investment decisions of such companies.
The introduction of SRR type powers in this Bill will be a powerful instrument to secure the necessary restructuring of the Irish banking system in the context of the programme. It will provide the Minister with a strong toolkit for dealing with distressed financial institutions. As the Minister made clear in the Dáil, however, contrary to conventional wisdom, SRR is not a panacea for minimising the fiscal cost to the State of our banking crisis, especially in light of the legal considerations in Ireland. The major banking costs incurred by the State could only be reduced where some of these losses were imposed on creditors of the banks. This Bill provides the powers for burden sharing involving subordinated debt by legislative means. Voluntary exchanges in respect of these instruments already undertaken and currently under way have avoided the requirement for even more State support for the banks. Discussions are ongoing at EU and international level on the mechanisms that may be available in future to share the fiscal costs of bank resolution with senior creditors of banks other than depositors.
Senator Alex White raised the question of whether these powers should have been introduced at an earlier stage. While Irish banks were still seeking to issue longer-term debt, it is very likely that the market reaction to the broad and extensive nature of the powers included in the Bill over the covered institutions would have been negative. There would have been serious potential to provoke the scenario for which it has been necessary to adopt a programme to resolve the exclusion of the domestic Irish banks from longer term funding markets and a substantial dependence on funding from the euro system. The scope for utilising the powers available under the Bill is enhanced by the availability of the resources provided under the programme for the repair of the banking system. This is not to indicate that the Government intends to draw resources from the contingency fund available other than are strictly necessary to achieve the objectives of the programme. Rather, it is unlikely to have been credible to advocate that the type of measures envisaged under the Bill would be deliverable solely within the fiscal capacity of the State.
The lead role and responsibility assigned to the Minister under the Bill reflects the major commitment of State resources to the banking system and the need to fully safeguard the State’s fiscal position in moving forward to implement the programme agreement. It is essential the Minister has wide discretion, drawing on the best expert advice, regarding the necessary steps or courses of action that should be embarked upon in seeking to resolve the challenges facing our banking system. I note that Senator Alex White expressed some understanding of the powers in section 53. These will be exercised by the Minister and his successor.
Senator Donohoe raised the question of why the legislation is urgent. The pace at which this legislation is being prepared and the urgency with which it must be enacted by the Oireachtas reflect three separate but related objectives. The first is the real and tangible value of demonstrating to the external parties to the programme, the wider international community and international markets the strength of the Irish authorities’ commitment to the delivery of key elements of the agreement, consistent with the ambitious timeframe for implementation.
The second is the clear benefit of having the necessary powers available to the Minister at the earliest possible stage when initiating a profound restructuring of the banking system envisaged under the programme. The reputation of our domestic banking system and its ability to meet its funding needs from market sources will only be rebuilt by undertaking the concrete measures to bring about a substantial reconfiguration of our banking system.
The third point is the imperative of empowering the Minister for Finance with the statutory authority to ensure all our institutions are in conformity with regulatory capital requirements set by the Central Bank at the end of this year. It is also essential the Minister is in a position to progress the joint restructuring of Anglo Irish Bank and Irish Nationwide Building Society while safeguarding the Exchequer. No Senator should doubt that the Minister for Finance is appropriately equipped with the necessary legal powers to continue to maintain financial stability in the State. That is the sole purpose of the legislation before us today and its enactment is urgent.
It is not true that extensive SRR legislation is widespread. The British legislation is extensive in scope and is regarded by many as international best practice. It has only been used for the resolution of a small regional building society. It was not used to deal with the difficulties in any of the larger British institutions. It is only in recent weeks that Germany received the approval of its lower house for its legislation. Denmark also recently published SRR legislation. At EU level, the European Commission has been developing legislation for a European resolution framework for some time and a proposal is not expected to be published until June 2011 by the European Commissioner for Internal Market and Services.
While the specifics of the Bill have been the subject of intense work since the conclusion of the discussion with the EU-IMF authorities, as the Minister has indicated, his officials have been examining options in recent months for the introduction of an extensive SRR having regard to evolving work at international level and the emerging EU framework. This Bill is an important bridge to the publication by March 2011 of a comprehensive SRR, taking account of developments elsewhere and being mindful of the specificities of the Irish banking system.
Senator Alex White asked about section 59. It is to ensure the Minister can use his powers under the Bill to make proposed orders without it being made public he is so doing. There will be considerable sensitivities, commercial and otherwise, surrounding the exercise of these powers and it could prove detrimental to the achievement of the objectives of the Bill if this requirement for confidentiality were not in place.
Senator Quinn will understand there are important issues relating to commercial confidentiality and market sensitivity relating to AIB. The bank issued a statement earlier this week acknowledging the publication of the Bill and the statement in the Minister’s press release that it provides powers to the Minister to ensure aid meets regulatory capital requirements by the end of the year.
Senator Donohoe mentioned the sale of assets in financial institutions. AIB sold its Polish subsidiary earlier this year, raising a good deal of money. A Polish diplomat said to me that possibly it was worth more than the market value of the rest of AIB put together. When assets are sold, the sale must be related to their value at the time. If they have a high value at present, there is a value in doing so.
I agree with Senator Boyle that it would have been an error to nationalise the banks at an earlier stage. I do not know where Senator Quinn got his information that the Bank of Ireland should be nationalised and, even less, where he got suggestions that John Bruton is in the Middle East with a particular purpose.
As Iceland is not a member of either the EU or the eurozone, I do not consider it to be comparable to Ireland. It does not accept the IMF and does not have obligations of a multilateral character to other countries in the way Ireland does.
As it irritates me at times, I must ask where the hard-nosed businessmen and bankers were during the property boom. There is an idealisation of the private sector, that those in it are more hard-nosed than the Government. The Financial Times pointed out last week that the genesis of our crisis was the private sector losing all restraint and getting itself into vast debt through over-optimistic development. There was nothing hard-nosed about Anglo Irish Bank or any of the others during that period. I am not saying for a second that the State sector, particularly the regulatory branch, acted perfectly; far from it. We have gone through all the criticism appropriate in that quarter. From my experience, negotiations between states and agencies are different from commercial negotiations and there is no evidence from around the world that businessmen are better at them just because they are good at commercial negotiation. I simply do not buy that. There have been examples in other countries of businessmen being brought into politics and there is no evidence that they perform any better than people who have long experience of politics, diplomacy and dealing with international financial issues.
As I am a member of the Council of State, I will not pass comment on Senator O’Malley’s question on the constitutionality of the legislation. People of my generation, which is also that of Senator O’Toole, enjoyed “Hall’s Pictorial Weekly”, and phrases such as “in the national interest” and “in the public interest” are now resurfacing after a generation. There is an important point, however, that the Minister, when he wants to make orders, must go to the High Court, so the existence of the preamble relates to that. An article in the Constitution relates to the exercise of private property rights and their protection subject to the common good. We are legislating in the context of a financial emergency. The phrase is fully justified. When I was a Senator, and subsequently, I have been persistently critical of the tendency to deify private property rights. I am not accusing Senator O’Toole in this regard. In certain instances, it has landed the State in considerable and unnecessary expense. A more hard-nosed approach was adopted 30, 40 or 50 years ago. In the culture of the 1950s, if a county council wanted to build labourers’ cottages in the countryside, there was no question of paying over the odds for the land. If anything, councils paid considerably under the odds. Under the same Constitution governing us today, the Land Commission issued land bonds for the acquisition of estates.
Deputy Martin Mansergh: We have gone to the opposite extreme. If one wanted to build a Luas line or something two, three, four or five years ago, a strip of land the length of the Chamber would have cost €2 million or €3 million.
Deputy Martin Mansergh: We may have gone from one extreme to another. To get out of our current situation, we must find a via media and bring some sense to what can be broadly called the compensation culture. Senator O’Toole has been involved with the Personal Injuries Assessment Board, PIAB, which was created by excellent legislative work during the last Oireachtas, notwithstanding the fact that many members of the legal profession disliked it.
|Boyle, Dan.||Butler, Larry.|
|Carroll, James.||Carty, John.|
|Cassidy, Donie.||Corrigan, Maria.|
|Daly, Mark.||Dearey, Mark.|
|Ellis, John.||Feeney, Geraldine.|
|Glynn, Camillus.||Hanafin, John.|
|Keaveney, Cecilia.||Leyden, Terry.|
|MacSharry, Marc.||McDonald, Lisa.|
|Mooney, Paschal.||Ó Brolcháin, Niall.|
|Ó Domhnaill, Brian.||Ó Murchú, Labhrás.|
|O’Brien, Francis.||O’Malley, Fiona.|
|O’Sullivan, Ned.||Ormonde, Ann.|
|Quinn, Feargal.||Ross, Shane.|
|Bacik, Ivana.||Bradford, Paul.|
|Burke, Paddy.||Buttimer, Jerry.|
|Cannon, Ciaran.||Coffey, Paudie.|
|Coghlan, Paul.||Cummins, Maurice.|
|Donohoe, Paschal.||Fitzgerald, Frances.|
|Hannigan, Dominic.||Healy Eames, Fidelma.|
|McFadden, Nicky.||Mullen, Rónán.|
|O’Reilly, Joe.||O’Toole, Joe.|
|Phelan, John Paul.||Regan, Eugene.|
|Ryan, Brendan.||White, Alex.|
An Cathaoirleach: In accordance with the order of the House, Committee Stage is due to start now but amendments to the Bill require to be processed. I ask the Leader to propose the suspension of the House for 20 minutes.
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